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What's your fraud IQ?

The groundwork for effective fraud prevention and detection is found
in an ethical staff that is expected to make ethical decisions and
then is fully supported in doing so. Organizations that enact robust
ethics programs send a clear message to their employees about which
behaviors are acceptable and which behaviors are prohibited. Do you
know the hallmarks of an ethical corporate culture? Are you ready and
able to help institute an effective ethics program at your
organization? Take this quiz and find out.

1. According to the Ethics Resource Center, what percentage of
workers observed ethical misconduct at their workplaces during 2013?

a. 14%.

b. 27%.

c. 41%.

d. 73%.

2. Generally speaking, what is the difference between a code of
ethics and a code of conduct?

a. A code of ethics applies exclusively to members of
management, whereas a code of conduct applies to all employees.

c. A code of ethics instructs employees on how to comply
with laws and regulations, whereas a code of conduct comprises the
company’s mission statement and core values.

d. There is no difference—the terms code of ethics
and code of conduct are synonymous.

3. As part of its current ethics program evaluation, Maple Inc.
management is revisiting the company’s code of conduct. During a
discussion about the existing code, a member of the management team
suggests that they should enact a specific code for just the company’s
executives. Which of the following is one of the goals of an
executive-specific code of conduct?

a. To provide a more stringent set of conduct standards
for executives than for the rest of the staff.

b. To reinforce policies addressing issues faced by all
levels of employees.

c. To establish harsher sanctions than legally required
for executives who commit fraud.

d. To replace the organization’s general code of conduct
for executives.

4. Which of the following statements regarding an ethics audit is true?

a. The objective of an ethics audit is to determine
whether the organization’s financial statements were created in
accordance with sound ethical principles.

b. The same audit procedures should be used in each area
of the company to ensure a consistent picture of the company’s ethical
culture is obtained.

c. To be effective, ethics audits must be performed by an
independent third party.

d. An ethics audit examines both qualitative and
quantitative data to arrive at an assessment of the company’s ethical culture.

5. As part of its new ethics initiative, management at Green Co. is
holding an ethics training session during which participants are
surveyed regarding the specific character attributes they associate
with ethical or unethical behaviors. Which of the following types of
ethics workshops is Green Co. holding?

a. A code of ethics assessment.

b. A code of conduct violations and outcomes discussion.

c. A personality analysis.

d. An application of the ethics decision-making process.

6. Which of the following statements regarding organizations’
cultural systems is true?

a. A company’s formal cultural system includes the
language used to communicate values throughout the organization.

c. A company’s informal cultural system includes the
organization’s mission and value statements.

d. All of the above.

7. In the wake of a corporate scandal, XYZ Co. management is
expanding the company’s ethics program and has decided to create a new
position for a chief ethics officer. To be most effective, the
individual in this position should:

a. Report directly to the company’s legal counsel.

b. Have direct, unimpeded access to the board of directors.

c. Be hired directly by the company’s vice president of operations.

d. Be exempt from performance goals to boost independence.

8. Which of the following is NOT a recommended practice for
incentivizing employees’ ethical behavior?

a. Providing employees with a list of general ethical
qualities that they should strive for to be rewarded.

b. Allowing employees to report instances of or other
employees who exhibit exemplary ethical behavior.

c. Including ethical behavior as a formal part of all
performance evaluations.

d. Empowering managers to reward employees who exhibit a
high level of ethics.

Answers

1. (c)The most recent National Business Ethics Survey conducted by
the Ethics Resource Center (ERC) found that 41% of private-sector
employees witnessed misconduct at their organizations during the 12
months preceding the study. This finding is a record low for the ERC’s
surveys and reflects some potential good news regarding the
effectiveness of many organizations’ ethics programs. Another positive
note from the ERC survey is the decline—from 13% in 2011 to 9% in
2013—in the percentage of employees who reported feeling pressure to
compromise their ethical standards on the job. However, 60% of the
incidents of observed misconduct were perpetrated by supervisors and
managers, and 67% of the misconduct involved multiple acts or ongoing
unethical behavior, revealing the need for companies to continue
taking proactive steps toward building an ethical culture.

2. (b)A code of ethics and a code of conduct are both integral parts
of an organization’s ethics program; in many organizations, the two
codes are collectively referred to as the ethics policy.
Although the two codes work in tandem to provide ethical guidance to
all employees, they serve different purposes and contain different
information to meet that objective. A code of ethics is a
principles-based code that describes broad ethical aspirations,
standards, and values that support employees in making judgments about
the underlying ethics of varying situations. In contrast, a code of
conduct is a rules-based code that describes acceptable and
unacceptable behaviors for specific situations that are likely to
arise, thereby removing the need for judgment in many circumstances.
In essence, the code of conduct gives substance to the code of ethics;
consequently, the code of ethics tends to be straightforward and
concise, while the code of conduct is usually more detailed and much longer.

3. (a)A company’s executives face different—and often more
serious—ethical dilemmas than the rest of the staff. And the choices
executives make typically have a much greater impact on the
organization. Since 24% of misconduct and 19% of frauds involve
organizations’ senior leaders, specific ethical guidance for company
executives sends a clear message about expected ethical conduct from
the top down. An executive-specific code of conduct should be in
addition to—not in place of—the general code of conduct, and should
address issues that are specifically applicable to management, such as
conflicts of interest and relationship issues, protection of
confidential information, financial reporting and disclosure issues,
influence on independent auditors, and requirements for reporting to
the board of directors and audit committee. Creating a separate code
of conduct for executives also demonstrates to other staff members and
outside parties the higher standards to which management is held.
Further, because senior leaders are the ones setting the standard for
acceptable behavior within the company, enacting more stringent
ethical requirements for those individuals supports and emphasizes a
strong tone at the top.

4. (d) According to the Society for Human Resource
Management, an ethics audit is “a comparison between actual employee
behavior and the guidance for employee behavior provided in policies
and procedures.” By its nature, this type of assessment relies heavily
on qualitative or subjective information; however, the ethics audit
team should also consider use of quantitative, measurable data—such as
employee performance review scores and helpline metrics—wherever
possible. Additionally, while an ethics audit conducted by an
independent third party will yield more objective results, ethics
audits are often conducted by the organization itself. If the audit is
conducted by an internal team, the team should consist of staff
members from various functions such as HR, compliance, legal, and
internal audit.

Procedures performed as part of an ethics audit typically include:

Reviewing the company’s ethics-related policies and procedures
against best practices, expected and actual outcomes, and
benchmarking data.

Interviewing employees about the
company’s culture and commitment to ethics.

Observing
processes for adherence to ethics-related policies and
procedures.

Analyzing the frequency, significance, and trends
in known misconduct.

Analyzing trends in reports of
wrongdoing by employees and others.

Examining how previous
ethical breaches were handled.

Asking management what the
company has done to prevent repeat occurrences of past
breaches.

The audit team’s selection and application of such procedures should
be based on the specific relevant ethics risks in each area (e.g.,
conflicts of interest in sales, falsifying company financial data in
accounting, and bribery in geographic regions where such practices are
common). Using this risk-based approach, the goal of the ethics audit
should be to identify gaps in the company’s policies and practices
where additional guidance or requirements would better serve employees
in making ethical decisions.

5. (c)If conducted effectively, ethics training can foster a culture
of trust. While there is no single best way to train employees in
ethics, training sessions are typically most effective when they are
conducted live, led by managers, and held in small groups. Ethics
workshops provide a more interactive and personal—and, thus, a better
retained—training experience than online or lecture-style programs.
Workshops can be conducted using a variety of approaches, but the goal
is to provide discussion-driven, applicable, and actionable learning
to all employees. Examples of some forms of ethics workshops include
the following:

Personality analysis, in which employees participate in
surveys that measure the character attributes associated with
ethical or unethical behavior (e.g., conscientiousness,
organizational citizenship, social dominance, and
individualism/collectivism).

Code of ethics assessment, in which employees review the
ethics code, assess how well the organization is living up to it,
note areas of strength, develop strategies to improve weaker areas,
and discuss whether any provisions of the code should be added,
removed, or revised.

Code of conduct violations and outcomes discussion, in which
actual cases of code of conduct violations and the resulting
punishments are discussed.

Application of the ethics decision-making process, in which
employees are walked through the ethical decision-making process
using real-life situations and collaborating to derive moral
solutions.

Application of the ethics code to a specific situation, in
which employees are provided with several real-life situations and
asked to determine whether specific behavior complies with or
violates the ethics code.

Ideal employee assessment, in which a profile of an ideal
ethical employee is developed and employees assess themselves
against this ideal to analyze their strong points and shortcomings
and then develop strategies for transforming their weaknesses into
strengths.

6. (b)In any organization, two ethical cultural systems are at play:
the formal system and the informal system. The formal cultural
system is composed of the policies and programs that are formally
established and adhered to in an effort to build and boost the
company’s ethical culture. Elements of a formal cultural system
include the organization’s mission statements, core value statements,
ethics policies, hiring processes, orientation and training programs,
and performance-management systems.

In contrast, the informal cultural system involves those
symbolic traits that influence employees in a more subconscious way,
such as company leaders’ responses to crises, the issues and
situations that leaders systematically pay attention to, the behavior
that is celebrated as part of company rituals (e.g., community service
days, awards to top salespersons), and the language used to
communicate values throughout the organization. Employees’ perceptions
of informal cultural systems tend to influence their ethics-related
behavior more than the formal systems, so attention to and proactive
management of these systems is especially crucial.

7. (b) As companies embrace the importance of fostering an
ethical culture from the top down, many organizations have created a
leadership position charged with maintaining, monitoring, and
continually improving the ethics program. Whether combined with the
duties of the chief compliance officer or divided into a separate
chief ethics officer role, a C-level official focused on ethics can
serve as an embodiment of the organization’s desired ethical culture.
The chief ethics officer role is typically charged with managing the
formal and informal components of the entity’s ethics program, as well
as leading the response to any potential violations thereof. However,
simply appointing a chief ethics officer to the executive team does
not ensure that the organization’s ethics program will be effective;
the individual must also be provided sufficient authority to carry out
these responsibilities. To ensure that the chief ethics officer is
positioned to be most successful, he or she should:

Be hired (and fired) only by the board of directors.

Report directly to the board of directors or CEO.

Have
direct, unimpeded access to the board for purposes of reporting
potential issues in order to mitigate the potential for management
interference.

Be held to performance goals and metrics set by
the board and CEO.

Be independent and free from conflicts
of interest, influence, and fear of retribution from parties inside
and outside the organization.

Have the necessary resources
to serve as a key member of the leadership team.

8.(a) Most organizations have performance management
programs in place to address and discipline ethical breaches. But far
fewer entities have implemented measures to formally incentivize
desired behavior. In other words, for many companies, the stick is
present, but the carrot is missing. To be fully effective, a
comprehensive ethics program should include mechanisms to address both
angles of encouraging ethical behavior.

Perhaps the most common method of incentivizing ethical behavior is
to incorporate ethical considerations into employee performance
evaluations. Requiring an assessment of employees’ ethics ensures that
management evaluates employees not only on which performance
objectives they met, but on how those goals were achieved. To
reinforce the importance of these factors, the results should be
considered in determining the employees’ bonuses and salary increases.
The results should also be a key factor in all promotion decisions.
Additionally, this type of assessment should carry as much weight—or
even more—in executives’ performance evaluations as they do in
staff-level employees’ performance evaluations.

Providing managers with the authority to reward employees who
exhibit a high level of ethics, such as with a small gift or bonus, a
one-on-one lunch, or some other incentive, is another effective way to
incentivize ethical behavior. For example, if a company has a gift
card program for rewarding outstanding employee efforts, management
should include exemplary ethical behavior as a category of rewardable
behavior, just as it would exceptional teamwork, problem-solving, or innovation.

Another mechanism to emphasize the importance of ethics is to
provide employees with a means to submit real examples of excellence
in ethical decision-making or behavior that they have observed in the
organization. Management can publicly acknowledge and praise the
examples received, as well as consider providing other rewards to the
ethical employee if the situation merits. This form of reverse
hotline, in which management seeks to collect reports of positive
behavior, rather than just ethical breaches, highlights the importance
the company places on detecting misconduct and fostering ethical conduct.

Whatever reward mechanisms management enacts, a large part of
successfully incentivizing employees to act ethically is to define
specifically what type of behavior company leadership considers
ethical. A clear and helpful way to do this is to tie these
expectations to the company’s value statements. Examples of such
expectations for ethical behavior might be:

Displaying integrity in all professional situations.

Being truthful in dealing with customers, co-workers, suppliers,
partners, and others.

Treating all customers, co-workers,
suppliers, partners, and other individuals fairly and
respectfully.

Exhibiting a commitment to serving the
community as a whole.

As with any other performance measurement, the examples must be
observable behaviors to facilitate witnessing, monitoring, and
rewarding—or correcting, reprimanding, and punishing—specific
incidents based on the clear criteria provided.

Scoring

If you answered all eight questions correctly, congratulations. Your
thorough knowledge of effective ethics program design will help you
effectively in the fight against fraud and misconduct. Keep up the
good work.

If you answered six or seven questions correctly, you’re on the
right track. Continue to build on your knowledge of ethics and fraud
prevention programs.

If you answered fewer than six questions correctly, you may want to
brush up on your knowledge. Enhancing your understanding of effective
ethics program components will help ensure that you have what it takes
to keep your organization protected from fraud.

Andi McNeal (amcneal@acfe.com) is
director of research for the Association of Certified Fraud Examiners.

To comment on this article or to suggest an idea for another
article, contact Jeff Drew, senior editor, at jdrew@aicpa.org or 919-402-4056.

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